SMG Details

The Scotts Miracle-Gro Company (NYSE: SMG) is amongst the world’s largest marketers of branded consumer products for lawn and garden care. It is having the industry’s most recognized brands and its Scotts®, Miracle-Gro® and Ortho® brands are market-leading in their categories. The company’s wholly-owned subsidiary, The Hawthorne Gardening Company is a leading player in delivering nutrients, lighting, and other materials that finds usage in the indoor and hydroponic growing segment.

Record Results in FY21 (For the Year Ended 30 September 2021)

• The company has delivered record financial results in FY21 driven by a company-wide sales growth and sustained growth in all major operating segments.
• The company-wide sales grew by 19% to a record $4.93 billion from $4.13 billion in FY20 and sales in the U.S. Consumer segment rose to $3.20 billion, up by 11% driven by robust consumer demand throughout the year.
• Further, Hawthorne sales grew by 39% to $1.42 billion owing to strong growth in all category segments in both emerging and legacy markets.
• GAAP earnings from continuing operations increased to $9.03 per diluted share against $6.78 per diluted share in FY20. Its Non-GAAP adjusted earnings stood at $9.23 per diluted share compared with $7.24 per diluted share in the prior year.

Exhibit 1: Profitability Trend

Source: Analysis by Kalkine Group

Declared Quarterly Dividend

The board of directors of the company, on 24 January 2022, have approved the payment of a cash dividend of $0.66 per share. The dividend will be paid to the shareholders on 10 March 2022 as of the record date of 24 February 2022.

Fortifying Hawthorne Gardening Portfolio Through Acquisitions of Luxx Lighting and True Liberty Bags

The company recently announced the acquisition of Luxx Lighting in a transaction which significantly reinforces The Hawthorne Gardening Company’s industry-leading lighting portfolio. This acquisition boosts a lighting portfolio that is currently much larger and more diverse compared to its nearest competitor. Additionally, the company undertook the acquisition of True Liberty Bags, the industry’s leading provider of liners and storage solutions to dry and cure plant products. This acquisition provides the company its first offering in this niche market.

Introduced Program to Connect Children to Gardens and Outdoor Play

In a move to connect 10 million kids with garden and greenspace programming by 2023 and to connect them to gardens and outdoor play, The Scotts Miracle-Gro Foundation recently opened its GroMoreGood Grassroots Grants with national nonprofit KidsGardening. This annual program is aimed at introducing the influential benefits of gardening to more children.

Acquired Rhizoflora’s nutrients business

The company, on 16 August 2021, declared the acquisition of Rhizoflora’s leading nutrients business along with its Terpinator and Purpinator brands. This acquisition will aid in further bolstering The Hawthorne Gardening Company product portfolio. Separately, its subsidiary, The Hawthorne Collective, has purchased a warrant to buy equity in Dewey Scientific for $3.2 million. This will aid in advancing Dewey’s industry-leading cannabis genomics and cultivation.

Key Metrics

The gross margin reduced to 30.3% in FY21 from 36.8% in FY17 and compared to 33.0% in FY20. However, ROE increased significantly to 60.4% in FY21 from 29.0% in FY17 and from 54.5% in FY20. Moreover, the company’s current ratio increased to 1.77x from 1.62x in FY17 and 1.28x in FY20.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form ~58.93% of the total shareholding while the top four constitute the maximum holding. Notably, Hagedorn Partnerships, L.P. and Kayne Anderson Rudnick Investment Management, LLC are holding a maximum stake in the company at 26.54% and 8.65%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The prevailing COVID-19 pandemic could have an adverse impact on its business, results of operation, financial condition and/or cash flows. Further, it is exposed to the risk of changes in regulations or regulatory enforcement priorities that could lead to an increase in its costs or restrict its ability to market all its products. It is also prone to the impact of climate change and unfavorable weather conditions that could adversely affect its financial results.

Outlook

The company has guided achieving company-wide sales growth of 0 to 3% in FY22 and the U.S. Consumer segment sales is expected to remain between 0 to negative 4%. However, it forecasts Hawthorne sales to grow by around 8 to 12% and maximum growth is anticipated in the second half of the year. Moreover, the non-GAAP adjusted earnings per share is likely to stay in a range of $8.50 to $8.90 and the gross margin rate is expected to decline by around 100 to 150 basis points.

Additionally, it has guided SG&A to remain in a range of negative 6% to positive 1% and the interest expense is expected to increase by around $25 million. Besides, the company intends to repurchase up to another $300 million in shares during FY22.

Meanwhile, the company will release its first quarter financial results on 1 February 2022.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/EBITDA multiple (NTM basis) considering its record financial results in FY21, and its continued focus on pursuing acquisition opportunities.

For the purpose of relative valuation, peers like FMC Corp (FMC.N), Air Products and Chemicals Inc (APD.N), among others have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of US$148.69 per share (Time: 9:47 AM, NY, US) on 25th January 2022.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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